Review of Economic Studies Vol. 73 No. 2 2006
Bid-Ask Price Competition with Asymmetric Information between Market-Makers
Abstract
This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.
- DOI
- 10.1111/j.1467-937x.2006.378_1.x
- Volume
- 73
- Issue
- 2
- Pages
- 329-355
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref